- Key insight: Banks are revisiting Ethereum Layer-2s for decentralized applications, such as tokenized deposits and interbank payments.
- What’s at stake: Stablecoin and market-standard legislation could redefine bank settlement and custody models.
- Forward Look: Expect accelerated Layer-2 adoption and clearer regulatory frameworks for bank-backed tokens.
It’s deja vu all over again.
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In the mid-2010s, a few large banks started developing applications that would run on the Ethereum open source distributed ledger. For instance, a team at JPMorganChase built Ethereum protocol Quorum to be used to facilitate interbank payments in 2016 (JPMorgan
They were looking for efficiency, immutable records and better communication between, say, parties to a supply chain, a correspondent loan or an international payment. If everyone could see the same records or transactions or records in real time at the same ledger, there would be far less need for middlemen and correspondence between parties — or so the logic goes. The Ethereum platform is a decentralized, open-source blockchain that lets developers build and run decentralized applications using smart contracts without intermediaries, sometimes using its native cryptocurrency, ether.
For several reasons, including leadership turnover, rivalry between banks, scaling issues and the difficulty of finding a return on investment, these projects mostly fizzled out or turned into something else.
But with the inauguration of President Donald Trump last year came a renewed interest in integrating crypto into the traditional financial system. Congress
More than 30 banks, including Bank of America, Citi, TD Bank Group and Wells Fargo, are collaborating with SWIFT on a blockchain-based platform that will use Ethereum for cross-border transactions. JPMorgan Chase lets its institutional clients send and receive money using its tokenized deposit JPMCoin on Base, an Ethereum Layer-2 blockchain built within Coinbase. And Citi, Vantage Bank and Custodia Bank use Ethereum technology for their tokenized, bank-backed U.S. dollar deposits on Ethereum.
“It’s very, very standard, very, very resilient, as we’ve seen across the ecosystem outside, but we run it on a very private basis,” Bis Chatterjee, global head of partnerships and innovation at Citi, told American Banker in a recent interview. “And because of that standardized nature, we think it gives us optionality to extend it and integrate it into other areas if possible.”
Vantage Bank and Custodia Bank selected Ethereum to underpin their tokenized deposits “because it is the most battle-tested platform for smart contracts, with multiple [secure] stablecoin projects successfully operating on it for years,” Caitlin Long, founder and CEO of Custodia Bank, told American Banker. “The degree of decentralization in the blockchain network is also a critical criterion, as some competing networks may have faster settlement times or higher throughput, but the concentration of transaction validators in those networks is a risk banks must consider.”
Last week, the Texas Bankers Association endorsed Vantage and Custodia’s tokenized deposit platform for its banks. Every stablecoin issued within the Vantage-Custodia network will originate as a tokenized deposit initiated by a consortium member bank, Long said.
“We are rolling it out step-by-step and deliberately, as banks must do,” she said.
Ethereum is not the only option for distributed ledger technology in finance. There’s the open-source Solana blockchain, which according to the Blockchain Council can process more than 65,000 transactions per second and has near-zero usage or “gas” fees. When Visa announced in December that it would allow card issuers and acquirers to settle in Circle’s stablecoin, USDC, Cross River Bank and Lead Bank said they had started settling with Visa in USDC over the Solana blockchain. Anchorage Digital has partnered with Western Union to launch a stablecoin on Solana. JPMorganChase uses Solana for tokenizing commercial paper.
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But Ethereum appears to be the first choice for many bank projects.
“Ethereum has a ton of momentum,” said Paul Brody, global blockchain leader at EY and chairman of the Enterprise Ethereum Alliance. Brody will be the guest of the February 17 episode of the American Banker podcast. “The thing that’s been super appealing for financial institutions is the Layer-2 value proposition, this ability to set up your own network and have your own capabilities and environment and set some of your own parameters.”
Why Ethereum?
One reason Ethereum is popular is that developers use it for their personal projects, according to Franklin Bi, one of the original developers of JPMorganChase’s Quorum, now managing partner at Pantera Capital.
“One thing that people often write about is the consumerization of technology,” Bi told American Banker. “Someone on their weekends or nights starts to play around with it, and then they happen to be an engineer at JPMorgan. And that’s initially how it happened.”
Originally, in 2015, JPMorganChase tried to build its own distributed ledger on bitcoin, Bi said.
“That was our first attempt, and we tried everything possible,” Bi said. “At the time, you could attach a little bit of extra data to your bitcoin transaction. And we said, okay, great, we’re going to build logic into these things, and we just hit a brick wall. A couple of our engineers said, hey, Ethereum just had its launch. We’ve been playing around with it. It’s much more expressive. It can actually hold real logic. We can do the things we actually want to do with it.”
Initial startups on Ethereum showed their applications worked. “You need to start somewhere,” Bi said. “If you’re at a bank, if you try to truly innovate from square zero, you’re not going to be able to make the business case that it’s going to work.”
Today’s reasoning for choosing Ethereum, or the Layer-2s that run on Ethereum (applications that run on top of the Ethereum blockchain, inheriting its security while striving to provide faster and less costly transactions)m “is much more advanced, because what the Layer-2s give institutions is the ability to customize those layers to their use case.”
For instance, Robinhood crypto chief Johann Kerbrata
“One of the reasons why it’s so compelling to them is they can configure that chain,” Bi said. “But it still benefits from being built on Ethereum, this thing that’s been alive for so long and is proven to be battle tested and secure. So it’s the perfect design choice for an enterprise, because if I’m Robinhood or JPMorgan, I really don’t want to rebuild Ethereum from the ground up. That’s going to take another 10 years. I just want my application to be successful. And for that, I need the software that’s operating on top of Ethereum today, where I can make these little tweaks.”
Some banks have looked to the success private companies like Circle, Coinbase and Tether have achieved, and seek the same, according to Bi.
“I think that’s what made people come back to the table and say, okay, we thought the ROI wasn’t there, but it clearly, it just went to a different place,” Bi said. “It went to the early stage companies. And now that the proof exists, we need to catch up.”
